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Europe

May 2012

  • European equity markets lurch lower.
  • Spanish woes sap investor sentiment.
  • Economic conditions remain challenging.

What European equity traders would give for a quiet month. No sooner had Greece been taken off the critical list than Spain was rushed into the emergency ward. The Iberian nation came under renewed pressure as economists worried that the latest government would be unable to meet its strict deficit reduction targets. Concerns also grew about the financial health of a number of Spanish banks. The country, meanwhile, is mired in recession and unemployment is approaching 25%. Borrowing costs remained around 6% for most of April.

Markets were thrown further into disarray after Francois Hollande beat incumbent Nicolas Sarkozy in the first round of the French presidential elections. M. Hollande, a socialist and no fan of austerity, has vowed, should he win, to re-write the recently agreed eurozone fiscal pact to make it a “growth pact”. This could cause tensions between bedfellows Germany and France. Voters will decide M. Sarkozy’s fate when they return to the polls on 6 May. There was further political upheaval after Mark Rutte, Dutch PM, resigned. His coalition collapsed after ministers failed to pass an austerity bill aimed at tackling the country’s deficit. Traders hate instability, and equities duly tumbled. At the time of writing, however, the caretaker government was able to force a version of the bill through.

Those looking for good news elsewhere struggled to find it. The economic picture was once again muddied after a series of disappointing data releases from the US. Markets had been hoping that the recovery in the world’s biggest economy would be robust enough to drag the rest of the developed world with it. Eurozone economic news was also disheartening. Confidence in the 17-nation currency bloc fell for the second straight month in April, according to European Commission surveys. Forward-looking readings were also disappointing. The EC went on to predict that the eurozone will contract by 0.3% this year. And while inflation fell to 2.6% last month, prices are still higher than analysts had forecast. This is a major headache for the European Central Bank: stubborn inflation could dissuade the Bank from cutting interest rates at a time when the economy is crying out for looser monetary policy.

It was a hodgepodge of the good and the bad in the corporate world. The biggest loser was Nokia. It relinquished its crown as the world’s largest mobile phone handset-maker this month, usurped by Samsung. The former had its credit rating cut to “junk” by Fitch after a shocking set of first-quarter numbers. The latter, by contrast, is on a roll, with profits up an impressive 81% for the same period. Adidas also enjoyed a lap of honour after its shares climbed to a record high. The German sports goods maker raised its profit target for the remainder of 2012, with excellent sales in China the main driver of growth.

Testing times, then, that saw the FTSE Europe ex-UK index shed 4.5% in local currency terms.

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